Why Chevron Remains A Strong Buy Ahead Of Earnings

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 |  About: Chevron Corporation (CVX)
by: Wall Street Playbook

Summary

From my vantage point, Chevron's management has done a decent job of growing where it can.

At around $132 per share, Chevron's fair market value should reach $145 in the next 12 to 18 months.

The stock is trading at just 11 times 2015 estimates of $11.35, which is 3 points lower than the industry average.

With worst-than-expected results coming out from BP (NYSE:PB), investors in leading energy giant Chevron (NYSE:CVX) are biting their nails in anticipation of what management will announce Friday when the company releases its financial results for the second quarter.

Chevron stock closed Wednesday at $132.53, up 0.08%. Shares are up 8% on the year to date, slightly trailing the energy sector's 14% gain. One of the reasons for the stock's underperformance has been Chevron's recent struggle with lower volume. This is the same issue that has impacted larger rival Exxon Mobil (NYSE:XOM).

Chevron's management has not lost focus, however. The company has highlighted a number of major initiatives scheduled to come online during the next few years. These include the liquefied natural gas [LNG] project in Angola, the deepwater project in Nigeria, the Caesar/Tonga project in the deepwater Gulf of Mexico, and the Chirag development in the Caspian Sea. From my vantage point, this makes Chevron's outlook even more promising than Exxon's.

What's more, that the stock has underperformed makes Chevron a great buying opportunity, especially with the company having boosted its dividend by 7% to $1.07 per share. The way I see it; on the basis of long-term growth in production, revenue and profits, Chevron remains one of the best no-brainers on the market. And Friday's earnings results will reveal that.

Wall Street will be looking for $2.66 in earnings per share on revenue of $56.93 billion. For the full year, the company is expected to report earnings of $10.78 per share, while revenue is projected at $227.74 billion. While both figures suggest year-over-year declines, it doesn't mean that Chevron has forgotten how to make money.

Consider, as the world's second largest oil company behind Exxon, production growth has been a struggle. In the most recent quarter, the company reported revenue of $53.27 billion, which fell 6.3% year-over-year. As with most oil giants, Chevron's facilities have been adversely impacted due to weather, which caused significant downtime in (among other areas) the U.S., Canada and Kazakhstan.

Likewise, in Exxon Mobil reported first-quarter revenue of $106.8 billion, which declined 1.5% year over year. I'm not making excuses, but situations like unplanned downtime and field declines can't always be avoided. They've proven too much to overcome.

From my vantage point, Chevron's management has done a decent job of growing where it can. And when you factor in the deepwater Gulf of Mexico projects like the Jack/St. Malo and Big Foot initiatives, which are projected for late 2014 and mid-2015 start-up, respectively, investors have plenty of reason to be encouraged that Chevron is poised to regain its standing among the best energy performers on the market.

All told, Chevron has a rich pipeline of growth projects, which I believe will strengthen the company for the next five years. And investors looking for a solid play in energy should consider Chevron on the basis of continued strength in both the upstream and downstream businesses.

At around $132 per share, Chevron's fair market value should reach $145 in the next 12 to 18 months. The stock is trading at just 11 times 2015 estimates of $11.35, which is 3 points lower than the industry average.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's energy sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.